In fact, in an echo of Richard B. Cheney’s 2003 advice to President George W. Bush that “deficits don’t matter,” Trump’s chief of both budget and staff, Mick Mulvaney, allegedly told Republicans that “nobody cares” about deficits anymore.
And even that framing of the issue makes it sound as if somebody once did care about them. In fact, while there’s been a lot of posturing, for many politicians, especially Republicans, government debt is something you care about when a Democrat is in the White House. It’s a political cudgel, not an economic principle.
As Politico’s Michael Grunwald pointed out Wednesday morning, efficiently summarizing the deficit politics of the last 40 years in one tweet, fiscal rectitude doesn’t help you, and fiscal recklessness doesn’t hurt you. This may be changing, given the fiscal impact of the Trump tax cuts, but for decades, most people thought Democrats piled on the debt and Republicans lowered it, even though the opposite is true.
That’s the politics of debt. But what about the economics? Is “nobody cares” a problem?
There’s no simple answer to that question, because there are times when deficits matter and times when they don’t. Like other progressives, I find it gratifying to see our politics recovering from years of “deficit attention disorder,” or damaging obsessions about public debt leading to punishing austerity, i.e., fiscal contraction when people still need the support of fiscal stimulus.
But, for reasons I’ll explain, there’s got to be more balance in this debate. Sometimes, deficits do matter, and one of those times is heading our way sooner than later.
First, however, let’s reflect on the positive aspects of the moment. For that, I turned to one of the most prominent advocates against over-worrying about fiscal imbalances, economist Stephanie Kelton. What did she think of the topic that conspicuously didn’t come up in Tuesday night’s address or rebuttals? She said:
“I found it refreshing. Fiscal imbalances aren’t a problem for the United States. Stacey Abrams was brilliant. She stayed focused on the real imbalances that plague our nation and our communities: income and wealth gaps, climate change, voter suppression, health care, gun violence and more. We have plenty of problems that need fixing. The debt isn’t one of them. I hope this is a sign we’ve opened a new chapter.”
I’m not quite where Kelton is, but her comments resonate with me. And she’s entirely right to label it “refreshing.” Democrats may finally be crawling out of the cramped fiscal box that Republicans successfully jammed them in years ago, by pretending to care about the debt only to put trillions in tax cuts on the credit card first chance they got (I vividly recall Republican Sens. Jeff Flake (Ariz.) and Bob Corker (Tenn.) complaining about the debt even as they voted for huge, deficit-funded tax cuts) and then arguing that the only way to fight the rising debt was to cut spending on Democratic priorities.
Any Democrat who falls for that trap shouldn’t be in office.
But while our fiscal imbalances “aren’t a problem,” as Kelton correctly notes, that won’t always be the case, for these reasons:
- Higher debt levels mean more tax revenue must be devoted to paying interest on the debt. As interest rates remain low, that’s not a problem, but rates could rise. To be clear, I’m not very worried about economic overheating (interestingly, the Federal Reserve has also dialed back such concerns), especially because fiscal stimulus is scheduled to fade later this year. But there’s no guarantee against that scenario. By the way, with about 40 percent of our public debt held by foreigners, an increasing share of interest payments leak out of the country.
- My ominous reference above about times when the debt level matters reflects my biggest concern about these dynamics. There’s a downturn out there somewhere, and we’ll be entering it with debt-to-GDP more than twice its historical level (roughly 80 percent vs. 40 percent). This is very likely to cause politicians to be too reluctant to engage in the countercyclical spending needed to offset the recession. To be clear, the problem is not true lack of fiscal space. Such countercyclical spending is temporary and, because it’s pro-growth, can improve the debt ratio relative to doing nothing (or not enough) to offset the negative demand shock. But entering recession at 80 percent debt-to-GDP invokes the lack of perceived fiscal space.
- It’s just a lot harder to pay for your spending preferences at high vs. low debt levels, and Democrats, as Kelton notes, have important preferences. Some of that difficulty is born of politics, but some is due to budget constraints that can, under certain conditions (slower growth, higher interest rates), be more binding than they are today.
It is for this reason that I’m finding something else refreshing, and it’s something I’d like to urge everyone who feels as I do about this to step up. I’m referring to the ideas of progressive Democrats to raise significant revenue on high levels of wealth and income to both push back on inequality and to pay for those preferences.
Moreover, while I’m more concerned about our imbalances than those on team Kelton, if Republicans refuse to countenance any new taxes, then Democrats have no choice. They either punt on their essential agenda or put it on the debt. And this is no time to punt.
So, if there’s anyone out there who still worries about fiscal imbalances, I challenge you to come out strong for the bold, revenue-raising plans offered by these Democrats. I understand some of you may find these plans too progressive, but at this moment in our fiscal politics, you’re either on that bus, or you’re in with Mulvaney and Cheney. Your call.